Surety’s Rights on Performance Bond Claims

Where a surety on a performance bond desires to compromise or settle claims
relating to the bond against others (affirmative claims), it should look to the General Indemnity
Agreement (GIA) provisions regarding assignment of claims and the
attorney-in-fact clause giving the surety the power to exercise all of its
assignment rights.

In Hutton Construction Co. Inc. v. County of Rockland, 52 F.3d 1191 (2d Cir. 1995) the contractor objected to the surety settling its affirmative claims arising out of the construction contract without the Indemnitor participating. The court found that the right to settle
provisions in the GIA standing alone did not give the surety the power to
settle the contractor’s affirmative claims. However, the right to settle
clause, when in applied in conjunction with the assignment of claims provision and
the attorney-in-fact provisions in the GIA, did in fact give such right to the
surety (to assert and resolve affirmative claims).

The Second Circuit in this leading case on the subject was compelled to this conclusion because the surety had demanded collateral of the contractor and the contractor had failed to post any collateral.

Counsel for sureties should carefully review the applicable GIA (General
Indemnity Agreement). The court in Hutton held that these provisions were bargained for and enforceable. They were triggered by the contractor’s breach in failing to accede
to the surety’s demand to post additional collateral. Hence, the sureties claims against the indemnitor should include a collateralization claim for relief.

Typical indemnity clauses include a paragraph which gives the surety the right to “settle, compromise, prosecute or defend any claim or action brought against the Company or any Indemnitor upon or relating to any bond or any affirmative claims by any indemnitor against company or athird party relating to any bonds…”

In addition, another standard paragraph in a GIA appoints the surety and its designees as the attorney-in-fact of the Indemnitors, with the right “power and authority but not the obligation to exercise all of the rights and powers of the Indemnitors assigned, transferred and set over to the surety.

These clauses should be adequate to assert affirmative
claims against third parties, pursuant to the Hutton doctrine. TheHutton case has also been recognized and followed in Texas (Texas law
applies per the choice of law provision in the SureTec Indemnity
Agreement). See, Harlandale Independent School District v. C2M
Construction Inc. 2007 WL 2253510 (Tex. Ct. App. August 8, 2007) Relying
on Hutton, the court found that the standard assignment, settlement and
attorney-in-fact provisions of the indemnity agreement assigned the principal’s
claim to the surety when the principal failed to post any collateral with the
surety etc.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on construction, real estate, secured finance and litigation.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established. Call 702-384-7111 or email Mark Albright at gma@albrightstoddard.com.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.